Posted: 23.03.2023 12:46:00

It’s scary, like in a bank...

The failure of American banks has caused a massive crisis of confidence in Western financial institutions. Is the crisis of 2008 repeating itself?

The bankruptcy of California’s Silicon Valley Bank (VSB) was taken by American billionaire Kenneth Griffin as a signal that capitalism in the US is ‘collapsing before our very eyes’. In addition, the international rating agency Moody’s has already downgraded the outlook for the US banking system from stable to negative. Although nothing out of the ordinary happened. The eternal process in the Western economy: some companies grow, others become cheaper or leave the market. Nonetheless, everything is much more complicated with the insolvency of the VSB. The bank did not burst due to managerial miscalculations (perhaps there were such). To a greater extent, it was knocked down by the US financial policy, as they say, along a wide perimeter. The fate of the VSB reflected all the underlying problems of the American economy.

Knock-on effect

Let us briefly recall the chronicle of events. In early March, Silveragate Capital, a bank specialising in servicing crypto assets, announced its liquidation. Following him, VSB faced an outflow of deposits, the main specialisation of which was lending to high-tech start-ups. It did not survive the raid of investors and declared his insolvency. The California financial authorities introduced external regulation in the bank. Following the VSB in New York, Signature Bank was closed at the initiative of the regulator. Its top managers acknowledged that the company had problems with liquidity. But they argued: they solved the problems with solvency. And the authorities prematurely put their paw on the bank. 
Strictly speaking, bankruptcies are not out of the ordinary in the cruel capitalist world. Sometimes even large corporations are stranded.
The main problem lies elsewhere. Even under the Darwinian principles of competition in a capitalist economy, a high roller (and VSB ranked 16th in terms of assets among US banks) should sink slowly according to procedure. And if it went to the bottom quickly, then it smacks of sabotage. This is what happened with VSB. The bank felt great back in February. Its capitalisation was estimated at $40 billion. Quite a decent number. And suddenly bankruptcy happened. Investors are always afraid not of risks, but of the unknown. Especially if some strange events can happen unexpectedly and kill their investment. Such force majeure invariably leads to distrust of all financial institutions, and is fraught with the flight of investors and depositors. And so begins, if not any, then many financial and economic crises. 
The knock-on effect threatened to bury the American banking system under the knuckles and spread to other markets. Last Monday, major stock indexes fell by 2-3 percent. Not only American, but also European — two financial markets are connected by one chain. Naturally, the prices of bank shares sank the deepest: they fell by 7-8 percent at the moment. 
Joe Biden’s peppy speech on March 13th, promising to punish the guilty bank managers and with assurances that nothing threatens the American financial system, did not actually inspire investors. However, mild fever continued on the stock exchanges. In fairness, it should be noted: the American financial regulator threw liquidity to the bankrupt and promised that depositors would not suffer (which cannot be said about investors). 
So far, the problem has been sorted out. After a disastrous Monday, quotes on the stock market began to slowly win back positions. However, some astute analysts believe that calm is the pause before the storm.

Dollar zugzwang

It is still premature to claim that the regulator has solved the problem. Now they are trying to restore the solvency of banks in a cunning way: they were provided liquidity on the security of treasury bonds. Everything seems to be logical: on the one hand, the financial authorities promise the owners of deposits to restore access to them and extinguish the panic, on the other hand, they withdraw bonds so that they do not splash out on the exchange market and completely undermine the quotes of a part of the American public debt. 

However, the catch lies in the fact that they are actually trying to fill the problem with money again. And this is a powerful inflationary factor. 

Investors are closely watching the Fed. Still, they perfectly understand that, to a large extent, the reason for the collapse of banks is a sharp increase in the key rate. If it rises or stays the same, the balance sheets of the many other holders of US government debt may fall. Financial institutions can be saved by a return to soft monetary policy. But then inflation, which slowed to six percent in February, is again in danger of rushing off into the clouds. And then the credibility of the dollar as such will suffer. The Fed is in zugzwang: in fact, it has to choose between the financial crisis and the loss of liquidity of the US currency. 

Take off your hats gentlemen

So, what do we have in the bottom line. The probable fraud with the loss of billions of client funds on the FTX crypto exchange backfired after more than four months to specialised banks. Their problems were catalysed by depreciating treasury bonds. The American national debt, as it turned out, brings problems, not stability. Of course, if you invest in it for a long time, and not engage in short-term speculation. 
How much government bonds will retain their liquidity still remains a very difficult question. But a speculative trend is emerging. And this is a signal to reduce the solvency of the government in Washington. Without funding its debt, the White House is no longer able to buy a muffin with coffee.
An obvious dilemma has also emerged: the Fed’s rate hike creates a distortion in the commercial sector. And it threatens deep crises with massive bankruptcies and all the economic and social problems that follow from this: household losses (some pension funds have already lost billions on the depreciation of bankrupt bank shares), falling demand, unemployment... The alternative is high inflation and a depreciation of both the dollar and dollar zone in the international financial system. Thus, this is the main economic and political asset of the United States.

Conclusion: so far, Washington cannot provide a soft landing scenario. And the risk becomes almost 100 percent that the financial bubble, inflated by emissions during COVID-19, will not deflate, but burst. In the meantime, there is a growing crisis of confidence: in the government, regulators, market participants... In addition the crisis of confidence is a key factor in a deep financial decline. In fact, this is exactly what happened in 2008. Well, history repeats itself.
It is very pleasant that the blast wave will practically not touch us. Thank you very much to the Americans, who, with their sanctions, prepared Belarus for its financial collapse, the likelihood of which is very high. We have practically no assets in Western securities and currencies. Economic interaction is also reduced to a minimum. 
Therefore, we venture to assume with a high degree of probability that the financial crisis will not be global, but will become regionally western. The fragmentation of the world economy concerns not only markets, but also crises. With restrictions, the Americans banned the export of their problems. However, this ‘asset’ can be completely left to itself. Is that to share with the Europeans and other allies.

Concerns are starting to prove justified: after the American banks, European banks begin to crumble. On the Swiss Stock Exchange (SIX) on Wednesday, March 15th, shares of Credit Suisse bank again updated a minimum and fell by more than 20 percent. However, a statement from the Swiss National Bank and an offer of $50 billion in bailouts could not help stabilise the situation. In addition, the announced merger between UBS and Credit Suisse would lead to massive layoffs and a huge cost to Switzerland’s reputation as a safe place to invest.
Italian banks were also affected by panic. By the middle of Wednesday, Monte dei Paschi fell 7.4 percent, UniCredit — 7.5 percent, which led to a halt in stock trading.

By Vladimir Volchkov